Dividend Counters with Potential Growth

I have always used fundamental analysis be it the top-down or bottom-up approach for any addition of dividend counters with good growth potential to my income portfolio. 

Although it works well so far, I have been wanting to qualify my analyses with a mathematical model to justify them.

Maybe it's due to my engineering and science background. I don't know.

I found what I wanted some time last year from a fellow member on one of the online platforms that I frequent.

Apparently there is a finance formula called Dividend Yield + Expected Capital Growth (DYG).

This formula uses the expected annual dividend, dividend payout ratio and ROE as the metrics for gauging whether a particular counter is a good income-paying one with long term growth.

I created a spreadsheet with formulas for easy calculation as shown below.

 

The ROE is calculated by dividing the EPS by the NAV per share.

The dividend payout ratio is calculated by dividing the dividend per share by the EPS.

I obtained the EPS, dividend amount and NAV from the companies' annual and quarterly reports instead of third party websites for accuracy sake. Just a personal preference.
 

Coming from a non-finance background I have never heard of this formula prior to this. And being a skeptical person (guess it's just my nature, I don't usually take things at face value.), I did some searches online but couldn't find any results on this formula.

So I did the next best thing. Using the formula on some counters in my watch list and monitor them for couple of months, including their latest quarter reports.

The counters identified back then as good counters (DYG >10%), largely performed well so far.

So I decided to do a new round of calculations for selected counters in my watch list today.

The latest DYG results are as follows.

The top 3 counters I've identified in my previous round of calculations some months back are still the same with this latest set of calculations.
 

I also did a little stress test to mirror the current macro situation by factoring a 30% reduction in expected dividends.

Interestingly the DYG value of some counters went up while the others decreased. There is no fixed pattern.

I'm still trying to analyse why but one thing for certain. Even after factoring the 30% dividend cut into the calculations, the top 3 counters are still the same. The change in the respective DYG value is insignificant, not even 1% difference.

Lastly I have appended below the raw data for your reference if it's helpful to you.

Most investors who have read enough annual reports will roughly know where to find data such as EPS and NAV.

Nonetheless it is still quite a chore to download the various AR and run through the pages for so many companies. I wouldn't wish anyone else to do it if you have a choice.

So here it goes.

Conclusion

Personally I find the DYG method complementary to my current stock selection methodology. Moving forward I will probably add it as one more step as a justification to my FA.

For sharing purpose I have summarised my methodology as follows.

1. Use stock screener to sieve out potential counters. Personally I use P/B, P/E and debt/equity ratios, net profit and dividend yield.

2. Use FA to narrow down the counters.

3. Use DYG method as a double check.

4. Purchase counter(s).

5. And enjoy the passive income.

P.s. Decided to use another font type and font colour for this post. Please feel free to let me know if it's better for viewing compared to previous posts. Thanks.

Fundamental Analysis and Technical Analysis

I'm more of a fundamental analysis person when it comes to stock investing.

There are many discussions about fundamental analysis (FA) and technical analysis (TA), advantages and disadvantages of one over the other, blah, blah, blah.

However as I tend to hold my stocks over a longer horizon, I feel a good analysis on the fundamentals of the company coupled with a look at the macro factors is an approach which works well for me so far.

5 of the most common factors that I use to screen my stocks are:

a) Dividend Yield
b) Net Profit
c) Gearing
d) P/E Ratio
e) P/B Ratio

In some cases I also look at the following:

a) 5 Year Dividend Growth Rate
b) Sales (TTM) vs Preceding Year
c) ROE

Nevertheless one cannot discount the importance of a good TA.

Many a times I find myself selling too early despite having a good entry price. Reading the charts will help judge a good exit price.

Another case in point. In a bull run like the one we are facing now, some stock prices are rising faster than you anticipated. Using TA can help you to do some quick trades and in the process, hopefully earn some quick bucks.

Conversely in a bear market, take advantage of a well-applied FA to grab solid counters at attractive prices for some long term holdings.

All in all, personally I feel FA is good for stock investment over a mid to long horizon and TA is useful when it comes to short term trading.

What do you think?